I. Whether the fiduciary duty of a corporate director extends to an individual shareholder given (1) the injury alleged to have suffered is solely confined to the individual shareholder and is neither shared with any other shareholder of the corporation nor suffered by the corporation itself, and (2) the individual shareholder does not have a contract or special relationship with the director to impose a fiduciary duty.

II. Whether a corporate director allegedly in breach of a fiduciary duty can be jointly and severally liable for a resulting damage award where the alleged injury is to an individual shareholder and not the corporation itself.

III. Whether the trial court erred as a matter of law where the trial court incorrectly assumed Appellant was a co-shareholder with Appellee and therefore incorrectly applied the heightened standard of co-shareholder liability.

¶2

STATEMENT OF THE CASE

¶3

This is an appeal from the district court's October 6, 2011 order granting in part Plaintiff Reed H. Danuser's ("Danuser") motion for summary judgment and the district court's October 11, 2012 memorandum opinion and order for judgment against Defendants IDA Marketing Corporation ("IDA Marketing"), IDA of Moorhead Corporation ("IDA Moorhead"), and James Leach ("Leach"). (Appellant's App. 87, 113). Danuser initially moved for summary judgment on the issue of whether the Defendants breached an employment contract between Danuser and the corporations by terminating him without cause, as well as the issue of whether IDA Moorhead and IDA Marketing failed to repay Danuser under certain promissory notes. (Id. at 87-93.) The district court determined Danuser had an enforceable employment contract with the corporations as evidenced by the corporations' Shareholder Control Agreement, the Amendment to the Shareholder Control Agreement, and joint resolution to approve Danuser's appointment as CEO and President. (Id. at 91.) The court also determined the contract clearly stated the grounds for termination, but whether IDA Moorhead and IDA Marketing had terminated Danuser "for cause" was an issue of fact inappropriate for summary judgment. (Id. at 91.) The court further found there were no issues of material fact with regard to the principle amounts of promissory notes due to Danuser. (Id. at 92.)

¶4

A trial was held July 16 through 18, 2012 before the Honorable Wickham Corwin in Fargo, Cass County, North Dakota. (Id. at 113.) Following trial, the district court issued a memorandum opinion and order for judgment on October 11, 2012, ordering judgment against IDA Marketing, IDA Moorhead, and James Leach, jointly and severally in the sum of $614,200 and judgment against IDA of Moorhead Corporation in the additional sum of $130,727.99. (Id.)

¶5

Because the district court had previously found a valid employment contract existed between Danuser and the corporations, the district court first examined whether a breach of the contract occurred and determined the corporations wrongfully terminated Danuser, as "the evidence failed to provide support for any of the stated grounds for termination" under the contract. (Id. at 118.) The district court then analyzed Danuser's claim against the individual Defendants, namely Leach, Steve Leach, David Gruenhagen, and Val Tareski, for breach of fiduciary duty. (Id. at 121-29.) The district court determined only Leach's actions were "inconsistent with the 'high fiduciary obligations' [he] owed to Danuser 'in all mutual dealings,'" but the remaining individual Defendants "were not culpable to the extent necessary to impose personal liability." (Id. at 128-29.)

¶6

Based on its findings regarding wrongful termination and breach of fiduciary duty, the district court also discussed the appropriate remedy for Danuser. (Id. at 129.) Rather than basing a remedy on the reasonable expectation of the parties as shown in the Buy/Sell agreement between the shareholders of IDA Marketing, including Danuser, the court set the value of Danuser's damages as a percentage of the gross sales price obtained for the sale of IDA Moorhead, even though Danuser had been terminated prior to such sale taking place. (Id. at 132-34.) Additionally, the court held Leach jointly and severally liable for all resulting damages due to his personal liability to Danuser for breach of fiduciary duty and ordered that Danuser have judgment against IDA Marketing, IDA Moorhead, and Leach, jointly and severally, in the amounts noted above. (Id. at 135, 139.)

¶7

IDA Marketing, IDA Moorhead, and Leach provided timely notice of appeal from the district court's memorandum opinion and order and summary judgment order on December 18, 2012. (Id. at 141-42.) Appellant Leach maintains that the trial court erred as a matter of law on two grounds. First, the trial court erroneously determined Leach owed a direct fiduciary duty to Danuser even though the alleged injury was confined solely to Danuser and is neither shared with any other shareholder of the corporation nor suffered by the corporation itself. Second, the district court abused its discretion with regard to formulating a remedy to Danuser in light of his Buy/Sell agreement with IDA Marketing. Accordingly, Leach respectfully requests this Court reverse the trial court's memorandum opinion and order for judgment dated October 11, 2012 and resulting judgment entered in this case.

¶8

STATEMENT OF THE FACTS

¶9

Appellant, Jim Leach, is an entrepreneur and businessman that created IDA of Moorhead in 1977 to manufacture electronic communications equipment. (ROA #16.) Leach initially served as IDA's sole stockholder and President. (Id.) Due to Leach's hard work and ingenuity, IDA grew over the years and by 1994, Leach had moved to Arizona and handed over the day-to-day operations of IDA of Moorhead to its four managers -- John Kruse, Steven Lee, David Gruenhagen, and Appellee, Reed Danuser. (Tr. 88:18-21.) Danuser had joined IDA of Moorhead in 1989 as a salesman. (Tr. 28:13-20.)

¶10

In 1994, Leach decided to sell IDA of Moorhead to Kruse, Lee, Gruenhagen and Danuser. The four managers created IDA Marketing Corporation to buyout Jim Leach and purchase IDA of Moorhead. (ROA #110.) Leach, IDA of Moorhead, and IDA Marketing executed a number of agreements to effectuate the sale of stock, including a Stock Purchase Agreement, a Security Agreement, a Shareholder Control Agreement, and Marketing Agreement. (Appellant's App. 31-43.)

¶11

The July 1, 1994, Stock Purchase Agreement provided that Leach was selling 2,421,118 shares in IDA of Moorhead to IDA Marketing at a price of $0.31 per share. (Appellant's App. 24.) In exchange for Leach's shares in IDA Moorhead, IDA Marketing agreed to deliver a capital debenture in the total amount of the purchase price. (Appellant's App. 26.) The debenture was payable with interest at the rate of 8% per annum and was to be paid in monthly installments at the pro rata portion of $9,000 per month. (Id.) In addition to the monthly installments, IDA Marketing was to annually pay 25% of the after tax profit of IDA Moorhead for the preceding year. (Appellant's App. 26-27.)

¶12

The Stock Purchase Agreement also provided that Leach would retain a security interest in the shares of stock of IDA Moorhead sold pursuant to the Agreement. If at any time IDA Marketing defaulted in payment of the monthly debenture payments due under the Agreement, Leach was to provide written notice of default and all payments of unpaid principal and interest would be accelerated and would be due and payable immediately if not cured within ninety (90) days. (Appellant's App. 27.)

¶13

IDA Moorhead, IDA Marketing, and Leach also executed a Shareholder Control Agreement dated July 1, 1994. (Appellant's App. 31-38.) The Shareholder Control Agreement provided that IDA Moorhead and IDA Marketing would have a combined Board of Directors and combined President/Chief Executive Officer. (Appellant's App. 32.) The Board of Directors was to consist of the following:

a. Two (2) persons to be selected by and serve at the pleasure of James L. Leach or his successor and assigns.

b. Two (2) persons to be selected by and serve at the pleasure of John Kruse, the Chief Executive Officer/Manger of IDA of Moorhead Corporation and IDA Marketing Corporation.

c. Vale Tareski or one (1) minority shareholder to be elected from the minority shareholder list and approved by the shareholders of IDA of Moorhead Corporation.

(Id.) The Agreement further named John Kruse as President/Chief Executive Officer at a salary of $47,300.00 per year. (Appellant's App. 33.) John Kruse was to be "in complete charge of the operation of the Corporations and shall have full authority and responsibility, subject to the general direction, approval, and control of the Board of Directors, for formulating the policies and administering the company in all respects." (Id.)

¶14

IDA Moorhead and IDA Marketing also entered into a Marketing Agreement on July 1, 1994. (ROA #117.) The Marketing Agreement provided that IDA Moorhead would continue to manufacture specialized mobile radio equipment and related products, and IDA Marketing would engage in the marketing of those products. (Id.) The Marketing Agreement further explained how the money would flow between the corporations. Paragraph 6 of the Marketing Agreement provided as follows:

MARKETING'S compensation under this Agreement, shall include such amounts as may be necessary to meet all of the obligations of Marketing, including, but not limited to the following:

A. Reimbursement of salaries and expenses incurred by MARKETING.

B. Such amounts as may be necessary to purchase and acquire the shares of stock of IDA MOORHEAD CORPORATION being acquired by MARKETING pursuant to written agreements with James Leach and others as well as those shareholders selling their stock pursuant to the terms of the Confidential Exchange Offer Memorandum dated on or about July 1, 1994.

(Id.)

¶15

The individual shareholders of IDA Marketing also entered into a Buy/Sell Agreement, setting forth their expectation of payment for stock upon the occurrence of "resignation, termination, death, demotion, and/or disability . . . of any of the Shareholders." (Appellant's App. 39-43.) Paragraph 3(a) of the Buy/Sell Agreement provided for the following elements to determine the total value per share and the redemption prices of each departing shareholder's shares:

(1) The total principal (not interest) of all payments to date made to shareholders of IDA Corporation who participated in the stock exchange.

(5) The number of shares owned by the departing IDA Marketing shareholder.

(Appellant's App. 40.) The Buy/Sell Agreement further provided that IDA Marketing share valuation was to be determined as follows:

(1) Divide the principal of payments to date by .31 to express the representative number of IDA of Moorhead shares paid for to date.

(2) Multiply the computed representative number of IDA of Moorhead shares times the determined IDA book value to express that total determined valuation.

(3) Divide the total determined valuation by the number of the outstanding shares of IDA Marketing to express the determined per share value of IDA Marketing.

(Appellant's App. 41.) The Buy/Sell Agreement concluded that the total amount payable to a departing IDA Marketing shareholder was to "multiply the number of IDA Marketing shares owned by the departing IDA Marketing shareholder times the determined per share value of IDA Marketing to express the total payable amount." (Id.)

¶16

Kruse served as the President/CEO of the IDA Corporations from 1994 to 2004. (Appellant's App. 33; ROA #161.) During Kruse's tenure, IDA Marketing failed to pay Leach any debenture payments some of the time and paid less than the full amount of debenture payments the majority of the time. (Appellant's App. 95-103.) As a result of IDA Marketing's continued failure to make the required debenture payments, Leach served a written notice of default on March 25, 2004. (ROA #64.)

¶17

When Leached served his notice of default on IDA Marketing, Danuser proposed a plan for Danuser to take over as President of IDA Moorhead and IDA Marketing. (Appellant's App. 44-45.) Kruse resigned as President/CEO and Leach agreed to withdraw his notice of default. (ROA #161.) Leach also agreed to forego receiving debenture payments for the next six months. (Tr. 516:20-24.)

Between 2004 and 2010, under the control of Danuser, IDA Marketing continued to default on its debenture payments to Leach. (Appellant's App. 95-103.) During this time period, Leach never received more than two-thirds of the full amount of debenture payments due. (Id.)

¶20

In August, 2010, Leach requested that IDA Marketing start paying the full amount of $4,457.80 in monthly debenture payments that were due. (ROA #202.) Danuser refused to honor the payments and informed Leach that the IDA Corporations were not in a position to make the required payments. (Id.)

¶21

On November 17, 2010, the joint Board of Directors called a special meeting to discuss Danuser's refusal to honor the debenture payments and general performance as President/CEO. (Appellant's App. 104-105.) Directors present at the meeting were Val Tareski, Steve Leach (by telephone), Dave Gruenhagen, Reed Danuser, and Jim Leach. (Id.) A written resolution was offered regarding the removal of Danuser as an officer and director of the IDA Corporations. (Id.) Following a lengthy discussion, the resolution was approved with Jim Leach, Steve Leach, Val Tareski, and David Gruenhagen voting in the affirmative. (Id.)

¶22

The resolution approved by the Board of Directors read, in relevant part, as follows:

BE IT RESOLVED that Reed H. Danuser be immediately terminated from his position as President/CEO [and any other positions of employment] in IDA Marketing Corporation, a North Dakota corporation, and IDA of Moorhead Corporation, a Minnesota corporation, pursuant to ¶ 5 of the Shareholder Control Agreement dated July 1, 1994, for cause due to Reed H. Danuser having made 'improper use of Corporate funds or property', and/or 'self dealing detrimental to the Corporation'. Reed H. Danuser's termination as an employee/officer with respect to either or both corporations is a result of (a) improper issuance of new shares of stock to himself in IDA Marketing Corporation in violation of ¶ 4(b)(15) of the Shareholder Control Agreement without the consent of four of the five Directors of the Corporation, and (b) assigning, selling or transferring assets (other than inventory), tangible or intangible, in excess of $25,000 per year in violation of ¶ 4(b)(11) of the Shareholder Control Agreement without the consent of four of the five Directors of the Corporation.

In addition, Reed H. Danuser has repeatedly caused IDA Marketing Corporation, . . . , to breach its obligations to James Leach [or his assigns] under (a) the Stock Purchase Agreement dated July 1, 1994, (b) the 8% Capital Debenture dated July 1, 1994, (c) the Security Agreement dated July 1, 1994, and (d) the resulting Escrow Agreement(s) involving James Leach's shares in IDA of Moorhead Corporation, all of which has the effect of adversely impacting the financial position and viability of IDA Marketing Corporation.

(Appellant's App. 46-48.) As a result of the resolution, Danuser was immediately terminated and escorted out of the IDA premises. Leach was then appointed as President and CEO to replace Danuser in those capacities. (Appellant's App. 47.)

¶23

On or about November 24, 2010, James Leach, Steve Leach, Darlene Leach, Sheryll Barber, and Frank Barber declared their debenture payments in default. (ROA #206.) The Board of Directors subsequently waived further notice of default and allowed Leach and the original selling shareholders to reclaim possession of the stock in IDA Moorhead. (Appellant's App. 106.) IDA Moorhead was eventually sold to SNAPS Holding Company for the total purchase price of $1,180,000.00. (ROA #215.)

¶24

Danuser commenced the present action on or about January 4, 2011.

¶25

LAW AND ARGUMENT

¶26

I. The Trial Court Erred as a Matter of Law in Finding Leach Breached a Fiduciary Duty to Danuser Because Leach did not Owe a Fiduciary Duty Directly to Danuser as a Director or as a Shareholder.

¶27

A. Standard Of Review

¶28

The fiduciary duty a director or shareholder owes a corporation or other shareholders is a question of law reviewed by this Court de novo. See Kortum v. Johnson, 2008 ND 154, ¶ 24, 755 N.W.2d 432. Conversely, whether an action against shareholders or directors of a corporation constitutes a breach of a fiduciary duty under N.D.C.C. ch. 10-19.1 is a question of fact subject to a clearly erroneous standard of review. Id. "A finding of fact is clearly erroneous if it is induced by an erroneous view of the law, if no evidence exists to support the finding, or if, on the entire record, we are left with a definite and firm conviction the trial court made a mistake." Brandt v. Somerville, 2005 ND 35, ¶ 12, 692 N.W.2d 144. The trial court's findings should be stated with sufficient specificity in order to enable this reviewing Court to understand the factual basis for the trial court's decision. Id.

¶29

B. Leach's Fiduciary Duty as a Director Extended to the Corporation and Shareholders Collectively, not Individual Shareholders, such as Danuser.

¶30

North Dakota Century Code chapter 10-19.1, the Business Corporations Act, sets forth a director's fiduciary duty in clear terms. "A director shall discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances." N.D.C.C. § 10-19.1-50(1); see also N.D.C.C. § 10-19.1-60 (providing the same standard of conduct in a separate section for corporate officers). Therefore, first and foremost, a director's duty extends to the corporation as an entity "to act in all things of trust wholly for the benefit of the corporation." Prod. Credit Ass'n of Fargo v. Ista, 451 N.W.2d 118, 121 (N.D. 1990).

¶31

In light of the explicit obligation of directors and officers to act in the best interests of the corporation, this Court has held that "an officer or director of a corporation owes a fiduciary duty to the corporation and its stockholders." Id. However, the duty does not extend to the stockholders individually, and it rather "extends only to the stockholders collectively." Id. (citations omitted). As a result, actions alleging a director's breach of a fiduciary duty for failure to act appropriately or in the best interests of the corporation generally belong to the corporation and its stockholders together. With an inability to assert the existence of a fiduciary duty between an individual stockholder and a director, the stockholder's suit for breach of such a duty cannot proceed. See id. Other jurisdictions are in agreement with this Court's prior interpretation of the extent of a director's fiduciary duty. See In re Black, 787 F.2d 503, 506 (10th Cir. 1986), abrogated on other grounds by Grogan v. Grogan, 498 U.S. 279, 291 (1991) (stating "a corporate officer owes a fiduciary duty to the corporation and to its shareholders[, but] this duty is owed to the shareholders collectively, and no fiduciary duty is owed to the stockholders individually."); FDIC v. Howse, 802 F. Supp. 1554, 1562 (S.D. Tex. 1992) ("Normally, a corporate officer owes a fiduciary duty to the shareholders collectively, i.e., the corporation, but he does not occupy a fiduciary relationship with the individual shareholder, unless some contract of special relationship exists between them in addition to the corporation relationship."); Konrad v. 136 E. 64th St. Corp., 246 A.D.2d 324, 325 (N.Y. App. Div. 1998) ("The duty owed by a director is that of a fiduciary to a corporation and to its shareholders, collectively."); Morgan v. Ramby, 2008-Ohio-6194, ¶ 22 (Ohio Ct. App. 2008) ("Directors owe a fiduciary duty to the corporation and to the shareholders, collectively."); Redmon v. Griffith, 202 S.W.3d 225, 233 (Tex. Ct. App. 2006) ("[A] corporate officer owes a fiduciary duty to the shareholders collectively, i.e., the corporation, but he does not occupy a fiduciary relationship with the individual shareholder . . . ."); McLaughlin v. Schenck, 220 P.3d 146, 153 (Utah 2009) ("[D]irectors and officers are required to carry out their corporate duties in good faith, with prudent care, and in the best interests of the corporation. These corporate duties have been interpreted to coincide with the common law understanding that officers and directors owe these duties to the corporations and shareholders collectively, not individually.") (citations omitted).

¶32

The Business Corporations Act further provides a director can be personally liable for breach of fiduciary duty as a director, such as a duty of loyalty to the corporation and its shareholders, but the additional liability exposure does not change the extent of a director's fiduciary duty. N.D.C.C. § 10-19.1-50(5). In fact, a director's potential personal liability remains limited to a breach of fiduciary duty that is owed to the entity itself, rather than individual shareholders. FDIC v. Wheat, 970 F.2d 124, 130 (5th Cir. 1992). As noted by the Fifth Circuit Court of Appeals, "all [courts] agree the director's personal liability lies only to the entity that he or she represents, and not to the individual shareholders . . . of the corporation." Id. (citing Briggs v. Spaulding, 141 U.S. 132, 146 (1891), abrogated on other grounds by Atherton v. FDIC, 519 U.S. 213, 226 (1997)).

¶33

In this case, Appellant James Leach was a joint director on the board for IDA Moorhead and IDA Marketing. In his capacity as a director, Leach had an obligation to act in the best interests of the corporations, and his fiduciary duty extended to both corporations and its shareholders collectively. See Ista, 451 N.W.2d at 121. However, as a director, he had no fiduciary obligation specifically and directly to individual shareholders, such as Appellee Reed Danuser, pursuant to section 10-19.1-50 of the North Dakota Century Code. See id.; see also Redmon, 202 S.W.3d at 237 (holding that directors did not violate any fiduciary duty in allegedly using "squeeze out" tactics against a shareholder because any duty owed by the directors was to the corporation under such capacity).

¶34

Within its memorandum opinion and order, the trial court addressed whether the individual defendants, namely Appellant Leach, Steve Leach, David Gruenhagen, and Val Tareski, breached their fiduciary duties to Danuser by terminating his employment, and it erroneously determined Leach had breached a duty. (Appellant's App. 120.) Although the court appropriately cited section 10-19.1-50, the applicable standard of conduct to Leach as a director, the court failed to note the existence of Leach's duty as a director did not extend as a matter of law to Danuser as an isolated shareholder. See Ista, 451 N.W.2d at 121. The injury Danuser alleged to have suffered as a shareholder was his termination from IDA Marketing, yet his injury was solely confined to himself and it was neither shared with any other shareholder of the corporation nor suffered by the corporation itself. (Appellant's App. 128.) Therefore, Leach in his capacity as a director had no fiduciary duty specific to Danuser to breach under section 10-19.1-50 of the Business Corporations Act, and the trial court was in error to find otherwise.

¶35

C. Leach did not Have a Contract or Special Relationship with Danuser Directly to Impose a Fiduciary Duty.

¶36

As noted by the trial court, "[c]hapter 10-19.1, N.D.C.C., imposes a duty upon officers, directors, and those in control of a corporation to act in good faith, and affords remedies . . . if those in control act fraudulently, illegally, or in a manner unfairly prejudicial toward any shareholder." (Appellant's App. 121) (quoting Lonesome Dove Petroleum, Inc. v. Nelson, 2000 ND 104, ¶ 30, 611 N.W.2d 154). However, it is clear from the Business Corporations Act that standard of conduct applicable to directors is delineated from the remedies available to minority shareholders. Compare N.D.C.C. § 10-19.1-50(1), with N.D.C.C. § 10-19.1-115(1). Therefore, the remedies provided in section 10-19.1-115 of the Act must be examined separately from the director's general fiduciary duty to the corporation as a whole. See Kortum, 2008 ND 154, ¶ 16 (noting that the court, in determining whether to order relief to a party, must consider the duty owed to the party).

¶37

A shareholder may only receive the remedies allowed in section 10-19.1-115 if he is able to establish that directors or those in control of the corporation have acted fraudulently, illegally, or in a manner unfairly prejudicial toward the shareholder. N.D.C.C. § 10-19.1-115(1)(b)(2)-(3). This Court has also analyzed the remedies allowed under section 10-19.1-115 in terms of "fiduciary duties" owed to the shareholder, but it has only interpreted the remedy in actions involving co-shareholders. See, e.g., Balvik v. Sylvester, 411 N.W.2d 383, 387 (N.D. 1987). While a director's fiduciary duty may extend to individual shareholders under this section, the duty can only be imposed if the shareholder has some particularized right, contract, or special relationship with the director. See Myer v. Cuevas, 119 S.W.3d 830, 836 (Tex. Ct. App. 2003); see also Redmon, 202 S.W.3d at 234 (allowing a corporate shareholder "an individual action for wrongs done to him where the wrongdoer violates a duty arising from a contract or otherwise and owing directly to him to the shareholder" (emphasis added)).

¶38

In this matter, there is no specific contract existing solely between Danuser and Leach which designates a fiduciary duty that Leach owes him. Furthermore, prior to trial in this case, the trial court granted partial summary judgment, finding that Danuser had an enforceable employment contract "with the corporations" comprised of the Shareholder Control Agreement, its amendments, and the joint resolution to appoint Danuser as CEO. (Appellant's App. 87-93) (emphasis added). The documents, however, are insufficient to impose a fiduciary duty and specifically did not impose a duty directly to Leach in light of his limited capacity as director.

¶39

The Court of Appeals of Texas in Redmon v. Griffith found facts substantially similar to the present case compelling in holding that the directors of a corporation did not have a fiduciary duty directly to shareholders. 202 S.W.3d at 237. In Redmon, minority shareholders in a corporation brought an action on their own behalf against majority shareholders and directors, alleging the defendants had violated fiduciary duties to the shareholders when they used oppressive "squeeze-out" tactics to remove them from their contracted positions with the corporation. Id. at 231, 236. The court noted "[t]he fiduciary duty an officer or director owes to the corporation is distinguishable from a fiduciary relationship that may exist between . . . shareholders or otherwise by contract or other special relationship between the individual parties." Id. at 236. Despite the fact that the shareholder had an employment contract, the court nonetheless held that the defendants did not violate any duty as officers and directors of the corporation, as they did not have a fiduciary relationship specifically with the shareholders in that capacity. Id. at 237. Rather, the defendants, as officers and directors, owed fiduciary duties to the corporation. Id.

¶40

Similarly here, although a remedy exists if shareholders prove a director acted fraudulently, illegally, or in an unfairly prejudicial manner towards them, Leach's fiduciary duty to Danuser could only exist if there was a direct relationship with him. Without such fiduciary duty imposed through an employment contract alone, there is no means to allege a breach of such duty to another. See id. Accordingly, the trial court erred in finding Leach breached a fiduciary duty to Danuser.

¶41

D. Courts in Other Jurisdictions Apply Joint and Several Liability only in Cases where A Director is Liable for Breach of Fiduciary Duty to the Corporation, not Individual Shareholders.

¶42

The issue of whether a corporate director allegedly in breach of a fiduciary duty can be jointly and severally liable for a resulting damage award including other corporate defendants has not been addressed in North Dakota. In this case, the trial court determined IDA Marketing, IDA Moorhead, and Leach were liable to Danuser, and noted "it has been 'unanimously recognized' by other courts that a director's personal responsibility makes him jointly and severally liable for all resulting damages." (Appellant's App. 135 (citing Resolution Trust Corp. v. Block, 924 S.W.2d 354, 355-56 (Tenn. 1996)). However, courts recognize and apply joint and several liability only with respect to a director's liability to the corporation itself, rather than individual shareholders. See, e.g., Lawson v. Baltimore Paint & Chem. Corp., 347 F. Supp. 967, 977-78 (D. Md. 1972) (stating "a director may be liable to the corporation for the consequences of a breach of his fiduciary duty" and "[t]he liability is joint and several where two or more directors participate in the wrongful acts"); Seaboard Indus., Inc. v. Monaco, 276 A.2d 305, 309 (Pa. 1971); Knox Glass Bottle Co. v. Underwood, 89 So. 2d 799, 825 (Miss. 1956); Block, 924 S.W.2d at 355 (stating "it has been unanimously recognized that officer and director liability to the corporation for their collective actions is joint and several" (emphasis added)).

¶43

As noted above, Danuser has not alleged an injury to either IDA Moorhead or IDA Marketing upon which he could bring an action to assert Leach breached a fiduciary duty. In fact, the trial court did not find Leach injured the corporations with his actions, and it only determined his personal liability based on the alleged harm to Danuser. (Appellant's App. 128 (discussing how Leach's actions affected Danuser solely.)) As a result of its finding, the trial court then applied joint and several liability separate and apart from any equitable remedies it determined. (Appellant's App. 135.)

¶44

There was no basis, however, in applying joint and several liability with the court's determination of Leach's personal liability for a breach of fiduciary duty to Danuser. Because courts in other jurisdictions have applied joint and several liability in circumstances where the corporation itself is injured, the trial court here incorrectly premised its finding of joint and several liability when it specifically found Leach's liability as a director was for his actions solely to Danuser, rather than the corporations as a whole. See Block, 924 S.W.2d at 355-56. Accordingly, the trial court erred as a matter of law in finding Leach jointly and severally liable for all resulting damages.

¶45

E. The Trial Court Incorrectly Assumed Leach was a Co-Shareholder with Danuser and Erroneously Applied the Fiduciary Duties Owed to Shareholders.

¶46

North Dakota has recognized the distinction between a director's duties and a shareholder's duties to others in a corporation. See Nelson, 2000 ND 104, ¶ 30, 611 N.W.2d 154. The Business Corporations Act contemplates shareholder actions against each type of individual in the corporation and designates the fiduciary duty such individual owes to another. See N.D.C.C. § 10-19.1-115(1)(b)(2)-(3) (noting actions against "directors or those in control of the corporation" (emphasis added)). While directors must exercise their duty of loyalty in good faith, in a manner consistent with the corporation's best interests, and with ordinary prudence, another shareholder must exercise "utmost loyalty and good faith." Kortum, 2008 ND 154, ¶¶ 26-27, 755 N.W.2d 432 (noting the difference between a director's duties and shareholder's duties); see also Balvik, 411 N.W.2d at 387. A shareholder's duty is derived from N.D.C.C. § 10-19.1-115(4), which indicates that "all shareholders in a closely held corporation owe one another" a duty "to act in an honest, fair, and reasonable manner in the operation of the corporation." Kortum, 2008 ND 154, ¶ 26, 755 N.W.2d 432. Because the duty extends to individual shareholders, the fiduciary duty is separate, distinguished, and heightened from a director's duty. Morgan, 2008-Ohio-6194, ¶ 22 (stating "the fiduciary duty owed between shareholders in a close corporation differs from the fiduciary duty owed by an officer or director of a corporation"); Redmon, 202 S.W.3d at 236; see also Schumacher v. Schumacher, 469 N.W.2d 793, 798 (N.D. 1991) ("Where majority or controlling shareholders in a close corporation breach their heightened fiduciary duty to minority shareholders by utilizing their majority control of the corporation to their own advantage, without providing minority shareholders with an equal opportunity to benefit, such breach, absent a legitimate business purpose, is actionable." (emphasis added) (quoting Crosby v. Beam, 548 N.E.2d 217, 221 (Ohio 1989)).

¶47

In order to apply the shareholder's standard of conduct for an alleged breach of fiduciary duty, it is essential that a fiduciary duty in fact exists between the parties by reason of their co-shareholder status. See Kortum, 2008 ND 154, ¶ 15, 755 N.W.2d 432. The burden is on the shareholder asserting a breach has occurred to establish such duty. See id. (stating the shareholder must establish one or more of the circumstances described in N.D.C.C. § 10-19.1-115(1)(b) for judicial intervention). If established, the court must take the duty the shareholder owes to all others into consideration when fashioning appropriate relief to the aggrieved party, and it must also consider "the reasonable expectations of 'the shareholders' at the corporations' inception and as they develop." Id. at ¶ 16.

¶48

The trial court in this case incorrectly assumed Leach was a shareholder in IDA Moorhead and applied a heightened standard of conduct applicable between shareholders in a corporation rather than merely directors. Primarily, the trial court cited § 10-19.1-115(4) as one of its considerations of fiduciary obligations owed by Leach, noting "all shareholders in a closely held corporation owe one another" a duty "to action in an honest, fair, and reasonable manner." (Appellant's App. 121.) In addition, the trial court cited Kortum v. Johnson in support of its ultimate conclusion that Leach acted "completely inconsistent with the 'high fiduciary obligations' [he] owed to Danuser 'in all mutual dealings" and "breached his duty 'of utmost loyalty and good faith.'" (Appellant's App. 128.)

¶49

The court's reliance on Kortum was misplaced based on the facts in this case. In Kortum, a shareholder in a closely held corporation brought suit against other shareholders, alleging they wrongfully expelled her from the corporation and acted in an unfairly prejudicial manner in violation of their fiduciary duties. Kortum, 2008 ND 154, ¶ 2, 755 N.W.2d 432. This Court examined the duty the other shareholders owed Kortum and noted "[t]here is not a particular statutory section delineating the fiduciary duties closely held corporation shareholders owe one another," unlike the duties stated for directors and officers. Id. at ¶ 26. Rather, the Business Corporations Act provides for all shareholders "to act in an honest, fair, and reasonable manner in the operation of the corporation," and the North Dakota courts consistently apply "a duty of utmost loyalty and good faith" between shareholders. Id. at ¶¶ 26-27 (citing N.D.C.C. § 10-19.1-115(4); Schumacher, 469 N.W.2d at 797). The obligations of shareholders include not withholding dividends, using corporate assets preferentially, or engaging in oppressive or unfair negotiating tactics, as well as "an obligation to act with complete candor in their negotiations with each other." Id. at ¶ 28.

¶50

Furthermore, the Court in Kortum explained the duty owed between shareholders is "high" and shareholders owe one another such heightened duty "in all mutual dealings." Id. at ¶ 32. Such duty is in contrast to the director's explicit fiduciary duty as stated within the Business Corporations Act, whereby directors must discharge their duties in good faith, in a manner the officers believe to be in the corporation's best interests, and with the care of an ordinary prudent person in a like position under similar circumstances. Id. at ¶ 26. In considering whether to afford a party relief, it is necessary and required for courts to consider the particular "fiduciary duties" owed. Id. at ¶ 27 n.2.

¶51

The facts are entirely clear from the record that Leach was not a co-shareholder in IDA Moorhead or IDA Marketing with Danuser during the relevant events. In reality, and as acknowledged by the trial court, Leach owned 2,421,118 shares of IDA Moorhead, but he sold the stock in 1994 at a price of $.31 per share to IDA Marketing. (Appellant's App 24.) In return for his stock, Leach received merely a security interest in the stock and periodic payments in accordance with the 1994 debenture agreement. (Appellant's App. 26-27.) Regardless of whether the payments were seldom made in the full amount, Leach no longer was a shareholder in IDA Moorhead by reason of his sale of the stock in 1994.

¶52

It is further clear from the record that Leach did not own any stock in IDA Moorhead until he regained possession of the stock on November 29, 2010, which was after Danuser's termination from IDA Marketing on November 17, 2010. Notably, Leach was not a co-shareholder from the period of time Danuser assumed control of IDA Marketing as the CEO, President, director, and shareholder, which was 2004 to 2010. Since 1994, Leach was retired, and he had "played no role in the day to day operations of the company." (Appellant's App. 121.) Therefore, Leach could not have had any shareholder obligation to Danuser from the time he sold his stock to the time he repossessed it. See generally Kortum, 2008 ND 154, 755 N.W.2d 432 (implying the parties must both be shareholders in order to assert a fiduciary duty exists as such).

¶53

The trial court extensively discussed Leach's actions from 1994 to 2010 as they culminated to Danuser's termination. In particular, the court noted Leach did not declare a default of the debenture payments despite the fact that he was only receiving partial payments, if at all. (Appellant's App. 122-123.) However, any obligation to declare default was established within the debenture agreement itself, and Leach was not a co-shareholder of IDA Marketing or IDA Moorhead with Danuser during the time frame he did not declare default.

¶54

Moreover, the trial court emphasized Leach "orchestrated" the November 17, 2010 board meeting that resulted in Danuser's termination. (Appellant's App. 124.) Yet, while Leach was involved in IDA Moorhead and IDA Marketing as a director, he was not a shareholder in either of the corporations at the time Danuser was terminated. Once Danuser was no longer the President/CEO and director of the joint IDA Moorhead and IDA Marketing board, Leach regained his stock and became a shareholder once again. At a point when Danuser was no longer a shareholder or director, the board concurred in selling the business. The shareholders of IDA Moorhead were then able to claim their appropriate share of the sale proceeds, as they were entitled to receive.

¶55

In its findings, the trial court determined that Danuser was unfairly prejudiced because "[h]e lost everything, including his job and ability to share in the proceeds from the sale of the business." (Appellant's App. 128.) The court further noted Leach's actions were "completely inconsistent with the 'high fiduciary obligations' that Leach owed to Danuser 'in all mutual dealings'" and breached his duty "of utmost loyalty and good faith." (Id.) However, the events to which the trial court referred occurred at a time when Danuser and Leach were not co-shareholders; no such shareholder obligation arose between the parties during the timeframe the court described Leach breached a fiduciary duty.

¶56 In applying the heightened shareholder fiduciary duty to Leach, the trial court premised its conclusion on an erroneous view of the facts and an erroneous application of the law. See Brandt, 2005 ND 35, ¶ 12, 692 N.W.2d 144. In light of the clear record that Leach was not a co-shareholder of stock with Danuser during the time he was terminated from IDA Marketing, there was no basis to apply the shareholder standard as enunciated in Kortum. Accordingly, this Court should reverse the trial court's order finding Leach liable for breach of fiduciary duty.

¶57

II. The Trial Court Abused its Discretion in Determining the Remedy for Leach's Conduct.

¶58

The trial court erred by holding that Danuser should benefit from the sale of IDA Moorhead and setting the value of Danuser's shares/interest by dividing gross sales proceeds by his share in IDA Marketing. Danuser was terminated prior to the sale of IDA Moorhead and therefore the Buy/Sell agreement, as amended, established the reasonable expectation of Danuser as a shareholder of IDA Marketing upon termination of his employment and should have been used as the value of his shares/interest. The trial court's failure to use the correct standard was a misapplication of the law and therefore an abuse of discretion.

¶59

A. Standard of Review

¶60

The North Dakota Supreme Court reviews a trial court's determination about remedies under the abuse of discretion standard. Brandt, 2005 ND 35, ¶ 23, 692 N.W.2d 144 (citing Grinaker v. Grinaker, 553 N.W.2d 200, 203 (N.D. 1996)). A trial court abuses its discretion if it acts in an arbitrary, unreasonable, or unconscionable manner, if its decision is not the product of a rational metal process leading to a reasonable determination, or if it misinterprets or misapplies the law. Id. (citing Gonzalez v. Tounjian, 2003 ND 121, ¶ 37, 665 N.W.2d 705).

¶61

B. Trial Court Erred by Setting Danuser's Damages as a Share of Gross Proceeds from the Sale of IDA Moorhead.

¶62

The trial court analyzed Danuser's claims within the framework of N.D.C.C. ch. 10-19.1, the North Dakota Business Corporation Act. Although the North Supreme court has recognized that a trial court has discretion to fashion remedies for violations of N.D.C.C. ch. 10-19.1, the trial court does not have a blank slate to determine what relief should be granted. Section 10-19.1-115(4), N.D.C.C., requires consideration of Danuser's expectations as a shareholder in a determination whether he is entitled to relief under N.D.C.C. ch. 10-19.1. Kortum, 2008 ND 154, ¶ 29, 755 N.W.2d 432.

¶63

Under N.D.C.C. § 10-19.1-115(4), when the shareholders of a close corporation have entered a specific agreement concerning particular matters, that agreement is presumed to reflect the parties' reasonable expectations. Id. at ¶ 32. Section 10-19.1-115(4) specifically provides as follows:

In determining whether to order equitable relief or dissolution, the court shall take into consideration the duty which all shareholders in a closely held corporation owe one another to act in an honest, fair, and reasonable manner in the operation of the corporation and the reasonable expectations of the shareholders as they exists at the inception and develop during the course of the shareholders' relationship with the corporation and with each other. For purposes of this section, any written agreement, including an employment agreement and a buy-sell agreement, between or among the shareholders or between or among one or more shareholders and the corporation is presumed to reflect the parties' reasonable expectations concerning the matters dealt with in the agreement.

N.D.C.C. § 10-19.1-115(4) (emphasis added). North Dakota law expressly provides that a written agreement among shareholders concerning the shares to be issued by the corporation, control of the business of the corporation, the employment of shareholders of the corporation, and other matters, is valid and specifically enforceable if signed by all persons who are shareholders of the corporation on the date the agreement is first effective. N.D.C.C. § 10-19.1-83(2).

¶64

A controlling, written agreement among shareholders is exactly what the trial court was faced with in this case. In 1994, James Leach, IDA Moorhead, and IDA Marketing executed a number of agreements to effectuate the sale of stock, including a Buy/Sell Agreement. That Buy/Sell Agreement specifically provided, "Upon the occurrence of a resignation, termination, death, demotion, and/or disability of any of the Shareholders, the departing Shareholder shall surrender to Marketing the certificates representing the stock shares which he owns." (Appellant's App. 39.) The Buy/Sell Agreement provided for the following elements of the formula to determine the total value per share and the redemption price of each departing shareholder's shares:

(1) The total principal (not interest) of all payments to date made to shareholders of IDA Corporation who participated in the stock exchange.

(5) The number of shares owned by the departing IDA Marketing shareholder.

(Appellant's App. 40.)

¶65

The Buy/Sell further provided that the IDA Marketing share valuation was to be determined as follows:

(1) Divide the principal of payments to date by .31 to express the representative number of IDA of Moorhead shares paid for to date.

(2) Multiply the computed representative number of IDA of Moorhead shares times the determined IDA book value to express that total determined valuation.

(3) Divide the total determined valuation by the number of the outstanding shares of IDA Marketing to express the determined per share value of IDA Marketing.

(Appellant's App. 41.) The Buy/Sell Agreement concluded that the total amount payable to departing IDA Marketing shareholder was to "multiply the number of IDA Marketing shares owned by the departing IDA Marketing shareholder times the determined per share value of IDA Marketing to express the total payable amount. (Id.)

¶66

There can be no doubt that the Buy/Sell Agreement provisions just stated apply to Danuser in this case. Reed Danuser signed the Buy/Sell Agreement as a shareholder in 1994 and was appointed to the joint Board of Directors and President/CEO/Treasurer in the 2004 Amendment to the same. Furthermore, prior to trial in this case, the trial court granted partial summary judgment, finding that Danuser had an enforceable employment contract comprised of the Shareholder Control Agreement, its amendments, and the joint resolution to appoint Danuser as CEO. (Appellant's App. 87-93.)

¶67

Accordingly, the trial court should have determined the value of Danuser's shares/interest according to the provisions of the Buy/Sell Agreement. The correct value of Danuser's interest, as determined under formulas set forth in the Buy/Sell Agreement, is as follows:

¶68

Paragraph 3(a) calculation

Component of Formula

Amount Source

(1) The total principal (not interest) of all payments to date made to shareholders of IDA Corporation who participated in the stock exchange. $440,263.37 Appellant's App. 95. Amount reflects 3,132,361 participating shares x .31 per share = $971,031.91 less $529,490.50 (total still owed) and $1,278.04

(3) The .31 per share valuation of the stock used for the exchange. $971,031.91 Appellant's App. 95

(4) The total number of outstanding shares of IDA Marketing. 1050 Appellant's App. 94

(5) The number of shares owned by the departing IDA Marketing shareholder. 720 Appellant's App. 94

¶69

Paragraph 3(c)

(1) Divide principle payments to date by .31 to express the representative number of IDA of Moorhead shares per date. 1,420,204.42 $440,263.37 ÷ .31 = 1,420,204.42

(2) Multiply the computed representative number of IDA of Moorhead shares times the determined IDA book value to express that total determined valuation; $105,658.98 $233,037.00 x 45.34%

(3) Divide the total determined valuation by the number of the outstanding shares of IDA Marketing to express the determined per share value of IDA Marketing. $100.63 $105,658.98 ÷ 1,050

¶70

Paragraph 3(d)

(1) Multiply the number of IDA Marketing shares owned by the departing IDA Marketing shareholder times the determined per share value of IDA Marketing to express the total payable amount. $72,451.87 $100.63 x 720

¶71

As the Court can see, the actual amount Danuser was entitled to under the express provisions of the Buy/Sell Agreement is $72,451.87 ­ a far cry from the $569,267.92 calculated by the trial court. Such a misapplication of the law is an abuse of discretion and should be reversed by this Court.

¶72

The trial court erred by concluding the Buy/Sell Agreement was not controlling. Danuser's termination was an event explicitly covered by the Buy/Sell Agreement as a shareholder of IDA Marketing, and Danuser's rights as a shareholder are controlled by the Agreement if Danuser did not seek dissolution of IDA Marketing and the trial court did not order that remedy. Brandt v. Somerville, 2005 ND 35, ¶ 20, 692 N.W.2d 144 (citing In re Villa Maria, Inc., 312 N.W.2d 921, 921-23 (Minn. 1981)).

¶73

In Brandt, a non-controlling shareholder in a closely held corporation sued a controlling shareholder for breach of fiduciary duty and defendant counterclaimed to buy plaintiffs' stock for book value under the terms of stock transfer agreement. Brandt, 2005 ND 35, ¶ 1, 692 N.W.2d 144. After a bench trial, the trial court found that defendants had breached their fiduciary duties and ordered defendants to purchase plaintiffs' stock at book value. Id. The trial court applied the book value provision of a stock transfer agreement to defendants' buyout of plaintiffs' stock, and plaintiffs' appealed. Id.

¶74

The North Dakota Supreme Court agreed with the trial court and ruled that the trial court correctly applied the book value provisions of the stock transfer agreement between the parties. Id. at ¶ 14. The Court specifically supported the trial court's determination that the stock transfer agreement was binding on the parties, the terms of the agreement were not unreasonable, and plaintiffs' stock were subject to a buyout for book value as calculated under a formula in the agreement. Id. at ¶ 6.

¶75

The North Dakota Supreme Court specifically rejected plaintiffs' argument that application of the book value formula under the agreement was unreasonable, finding that plaintiffs' reliance on In re Villa Maria, Inc., 312 N.W.2d 921 (Minn. 1981) was misplaced. Although the court in In re Villa Maria ordered a stock buyout at market value rather than book value as provided in a shareholder agreement, the court had concluded that the shareholder's rights were not controlled by the agreement, but were governed by statutory provision authorizing dissolution and liquidation of assets. Id. at ¶ 20 (citing In re Villa Maria, Inc., 312 N.W.2d at 923).

¶76

Here, as in Brandt, the trial court should have ruled that the Buy/Sell Agreement was binding on the parties, the terms of the agreement were not unreasonable, and Danuser's stock was subject to the buyout for book value as calculated under the formula in the Agreement. Danuser was terminated on or about November 17, 2010, prior to any sale of IDA. As Danuser was terminated, the terms of the Buy/Sell Agreement commanded the buyout of his stock and similarly controlled the value of that buyout.

¶77

Similarly, the trial court's reliance on the language of N.D.C.C. § 10-19.1-115 regarding dissolution is misplaced. Danuser did not specifically seek dissolution and the trial court did not order that remedy. See also Kortum, 2008 ND 154, ¶ 48, 755 N.W.2d 432 (holding that if the plaintiff was not entitled to dissolution under N.D.C.C. § 10-19.1-115, she would only be entitled to the share price provided for in shareholder agreement).

¶78

Even if the trial court had ordered dissolution, it did not comply with the explicit requirements of N.D.C.C. § 10-19.1-115(3)(a) that the court shall order the sale for the price and on the terms set forth in a shareholder control agreement unless the court determined the price or terms are unreasonable under all circumstances of the case. Here, the trial court made no such findings and therefore must follow the formula set forth in the Buy/Sell Agreement. See Brandt, 2005 ND 35, ¶ 18, 692 N.W.2d 144 (holding that "courts may not rewrite a shareholders' agreement under the guise of relieving one of the parties from the apparent hardship of an improvident agreement, and we recognized the general proposition that, in a close corporation, a majority of courts have sustained restrictions that are determined to be reasonable in light of the relevant circumstances.").

¶79

In sum, the Legislature did not give courts free rein to determine the parties' "reasonable expectation" in situations such as this. "The Legislature instead directed that the court presume documents executed by the parties reflect their actual intentions." Kortum, 2008 ND 154, ¶ 61, 755 N.W.2d 432 (Crothers, J. concurring in part and dissenting in part). Accordingly, the Court should reverse the trial court and remand for findings consistent with the Buy/Sell Agreement in effect for the valuation of IDA shares. To hold otherwise would fail to give effect to the shareholders' agreement and erode the certainty of contract, diluting the Legislature's clear intent to allow shareholders to control their future through pre-dispute dissolution. Id. at ¶ 62.

¶80

CONCLUSION

¶81

Appellant James Leach respectfully requests that this Court reverse the trial court's memorandum opinion and order for judgment dated October 11, 2012 and the resulting judgment entered thereon and order entry of judgment dismissing Appellant's claims against James Leach in all respects.